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How to deal with energy crisis?

Nawaz Sharif is expected to announce his energy policy in a couple of weeks. Pakistan needs an integrated national energy strategy which must be developed by independent experts free from the influence of organisations such as the World Bank which supported highly flawed policies in the past or of the local vested interests such as the Independent Power Producers (IPPs).

The energy crisis is not about the installed capacity because the structural reasons go far beyond just the circular debt, bad governance and corruption. A lesson learnt from the 2008 global financial crisis, when big banks were brought under the state control by the western governments, is that during extraordinary situations that threaten to destabilise an entire system, there is no alternative to state intervention no matter how undesirable it may be in ideal conditions.

Pakistan’s unfavourable high cost energy mix lies at the core of the energy crisis. Today, the plants using imported oil represent the single largest source of electricity generation due to a flawed policy of supporting oil-powered plants by guaranteeing a minimum return to the investors. The policy attracted investments only in the thermal power as it offered a quick and almost riskless way to make money due to the generous terms offered to the investors. The most difficult and challenging part, that is, managing the distribution was not privatised. This policy while adding thousands of megawatts to the electricity generation capacity also made Pakistan hugely dependent on the most costly source, that is, thermal power, especially on oil. As long as oil accounts for a major portion of the electricity generation, Pakistan will continue to be a high-cost producer of electricity, contributing to a persistently higher inflation rate, and its industry will remain relatively less competitive and hostage to the volatile international oil price. The widening gap between the high cost of thermal power and the regulated electricity prices aggravated the present crisis.

But is it fair to ask the public to bear the entire cost of what is arguably the strategic blunder of the state compounded by bad governance? As a country, the most rational and optimal choice would be to import electricity till such time generation capacity of non-thermal sources is increased because the domestic cost of thermal power is prohibitively higher. Advocates of free markets and trade should support this argument rather than make a case for financing the white elephants called the oil-based power plants.

While the government apparently wants to use more public debt to reduce the circular debt, it is hardly a solution. The borrowing should be used only as a short-term measure and must be accompanied by a comprehensive three-pronged strategy focused around:

The most important part of this strategy would be a restructuring and rationalisation plan for the generation sector. This should include the following steps:

The government should attach the highest priority to importing electricity from the neighbouring countries as a temporary measure to minimise the adverse impact of high cost energy mix. Around 1500MW or even higher could be available from India and Iran and has the potential of reducing the 4000-7000MW shortfall by 30-50 per cent.

The government should aim to convert another 1500-2500MW idle capacity in the thermal sector into coal-based plants to bring down national average cost. Last year, Ukraine completed conversion of six thermal power plants to coal. To achieve this, most of the IPPs owned by the domestic companies should be bought by the federal government because they are not economically viable.

The residual financing gap should be financed through tariff hikes and additional direct income and property taxes with the target of raising an amount equivalent to at least 0.50pc of the GDP. For this purpose, a financial emergency may be declared in accordance with Article 235 (1) of the constitution and the federal government should help the provincial governments to raise more revenues as they currently lack the capacity to do so.

The level of transmission and distribution (T&D) losses has ranged around 22pc due to a host of factors including old-age generation plants, low-voltage transmission and distribution lines, weak grid infrastructure, inaccurate metering and billing, and outright theft. The experiment to improve distribution through setting up different regional companies also failed.

Consolidation of distribution companies at the provincial level via four companies (other than the KESC) and making the provincial governments a major stakeholder should be considered, provided the companies are run by autonomous boards consisting of professionals from the private sector. The distribution network requires political and administrative support of provincial governments, professional management as well as huge capital investments.

While some make a case for the so-called intermittent or alternative energy sources like solar and wind power, the supply from these sources is highly variable and can only supplement the three main sources of energy (fossil fuels, hydro, and nuclear). Therefore, in the long term, the government must not allow any more oil-based power plants and should focus on hydel (specially through smaller dams), coal, and nuclear energy because only a radical shift in the current energy mix can provide a lasting solution to Pakistan’s crippling energy crisis.